NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004

1 Description of Business and Future Prospects

Peak Entertainment Holdings, Inc, formerly Peak Entertainment Ltd, was
formed on November 20, 2001 as an integrated media group focused on
children. Its activities include the production of television
entertainment, character licensing and consumer products development,
including toy and gift manufacturing and distribution. Integration enables
Peak Entertainment Holdings, Inc to take property from concept to consumer
in-house, controlling and co-ordinating broadcast, promotions and product
launches (toys, apparel, video games, etc.) to build market momentum and
worldwide brand quality. The accompanying consolidated financial
statements have been prepared in conformity with accounting principles
generally accepted in the United States of America, which contemplate
continuation of the Company as a going concern. As shown in the financial
statements, at December 31, 2004 and for the twelve months then ended, the
Company has suffered recurring losses, negative cash flows from
operations, negative working capital, an accumulated deficit of $5,960,203
and a stockholders' deficiency of $2,077,133.

As shown in the accompanying financial statements, the Company incurred a
net loss of $2,026,205 during the current period. Current economic
conditions have limited the ability of the Company in acquiring additional
equity capital.

In response to economic conditions, management has implemented expense
reduction and revenue enhancements as well as initiated additional
investor financing. Specifically, management has implemented reductions on
the salaries of senior management. Also, nonessential capital
expenditures, travel and other expenses have either been eliminated or
postponed. Management has shifted its corporate and business development
activities to focus strategic resources. To that end, the Company
continues to pursue a three million dollar bridge financing round directed
toward existing and strategic investors. Management believes the
combination of these actions maximizes the probability of the Company's
ability to remain in business. A portion of that capital has been secured
recently but it is still uncertain at this stage whether the Company will
be totally successful in accomplishing these objectives. Without this
capital there is some uncertainty about the Company's ability to continue
as a going concern though management are close to completing this
transaction following the appointment of credible merchant bankers and
management consultants. The financial statements do not include any
adjustments that might be necessary should the Company be unable to
continue as a going concern.

The Company has developed a business plan to increase revenue by
capitalizing on its integrated media products. The Company is in constant
discussions with outside sources to provide the required funds to cover
operational costs. This continuous need raises substantial doubt about the
Company's ability to continue in existence. The financial statements do
not contain any adjustments that might result from the outcome of this
uncertainty. While the Company is optimistic that it can execute its
business plan, there can be no assurance that;

a) increased sales necessary to obtain profitability will materialize,
and

b) the Company will be able to raise sufficient cash to fund the
additional working capital requirements.

Cameo Collectables Ltd was formed on August 20, 2002 and was owned by
Wilfred and Paula Shorrocks until February 7, 2003 when Peak Entertainment
Holdings, Inc acquired the whole of the share capital of Cameo
Collectables Ltd. Prior to February 7, 2003 the financial statements of
Cameo Collectables Ltd were combined with Peak Entertainment Holdings, Inc
as both entities were under common control.

37

(B) Basis of Preparation

The financial statements have been prepared on a going concern basis, the
validity of which depends upon future funding being available. The
validity of the going concern concept is also dependent upon the continued
support of the directors.

Should such support be withdrawn and funding not made available, the
company may be unable to continue as a going concern. Adjustments would
have to be made to reduce the value of assets to their recoverable amount
to provide for any further liabilities which might arise and to reclassify
fixed assets as current assets.

38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004

2 Summary of Significant Accounting Policies (continued)

(C) Risks and Uncertainties

The entertainment/media industry is highly competitive. The Company
competes with many companies, including larger, well capitalized companies
that have significantly greater financial and other resources. The
Company's success is dependent upon the appeal of its entertainment
products. Consumer preferences with respect to entertainment products are
continuously changing and are difficult to predict. Therefore, the
Company's success will depend on its ability to redesign, restyle and
extend the useful life of products and to develop, introduce and gain
customer acceptance of new entertainment products. The Company's ability,
or inability, to manage these risk factors could influence future
financial and operating results.

(D) Revenue Recognition

The Company generates revenues from three distinct sources; the license
fees generated from the production of television entertainment, character
licensing and sales of character related consumer products. Revenue from
the production of television entertainment is recognized in accordance
with Statement of Position 00-2 "Accounting by Producers or Distributors
of Film". Under this guidance, the Company recognizes revenue from the
sale of television entertainment when all of the following conditions are
met:

1. Persuasive evidence of a sale or licensing arrangement with a
customer exists,

2. The television episode is complete and, in accordance with the terms
of the arrangement, has been delivered or is available for immediate
and unconditional delivery,

3. The license period of the arrangement has begun and the customer can
begin its exploitation, exhibition or sale, and

4. The arrangement fee is fixed or determinable.

Revenue from character licensing arrangements is recognized over the life
of the agreement. Revenue from the sale of character related consumer
products is recognized at the time of shipment when title of the products
passes to the customer. Amounts received in advance are recorded as
unearned revenue until the earnings process is complete.

(E) Intangible assets and amortization

Intangible assets are stated at cost less accumulated amortization and any
provision for impairment. Amortization is provided on intangible fixed
assets over their expected useful lives as follows:

Trade marks - 10 years
Website development costs - 3 years

Licensing rights are amortised on a straight line basis over
the term of the agreement, which range from 3 years - 20
years.

39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004

2 Summary of Significant Accounting Policies (continued)

(E) Intangible assets and amortization (continued)

Web Site Development Costs

In March 2000, EITF No. 00-02, Accounting for Website Development Costs,
was issued which addresses how an entity should account for costs incurred
related to website development. EITF 00-02 distinguishes between those
costs incurred during the development, application and infrastructure
development stage and those costs incurred during the operating stage. The
Company expenses all costs incurred during the development and operating
stages. The Company evaluates costs incurred during the applications and
infrastructure development stage using the guidance in Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use".

(F) Plant and equipment

Plant and equipment are stated at cost, net of accumulated depreciation.
Depreciation is provided on plant and equipment over their expected useful
lives as follows:

Costs associated with the repair and maintenance of plant and equipment
are expensed as incurred.

(G) Film and television costs

The Company capitalizes the costs of developing film and television
projects in accordance with Statement of Position 00-2 "Accounting by
Producers or Distributors of Film". These costs will be amortized using
the individual-film-forecast-computation method, which amortizes costs in
the same ratio that current period actual revenue bears to estimated
remaining unrecognized ultimate revenue at the beginning of the current
fiscal year. The Company has recorded no amortization to date as revenue
has yet to be recognized.

(H) Asset Impairment

The Company periodically evaluates the carrying value of long-lived assets
when events and circumstances warrant such a review. The carrying value of
a long-lived asset is considered impaired when the anticipated
undiscounted cash flow from such an asset is separately identifiable and
is less than the carrying value. In that event, a loss is recognized based
on the amount by which the carrying value exceeds the fair market value of
the long-lived asset. Fair market value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk
involved.

(I) Cash Equivalents

For purposes of the statements of cash flows, all temporary investments
purchased with a maturity of three months or less are considered to be
cash equivalents. The Company maintains bank accounts in the United States
of America, United Kingdom and Hong Kong. The balances held in these
accounts are $11,161, UK(pound)(1,123), and HK $1,998 respectively.

40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004

2 Summary of Significant Accounting Policies (continued)

(J) Inventories

Inventory is valued at the lower of cost or market, with cost being
determined on the first-in, first-out basis. The Company reviews the
book value of slow-moving items, discounted product lines and
individual products to determine if these items are properly valued.
The Company identifies these items and assesses the ability to
dispose of them at a price greater than cost. If it is determined
that cost is less than market value, then cost is used for inventory
valuation. If market value is less than cost, then the Company
establishes a reserve for the amount required to value the inventory
at the market value. It the Company is not able to achieve its
expectations of the net realizable value of the inventory at its
current value, the Company adjusts its reserve accordingly.
Inventory is comprised entirely of finished goods.

(K) Advertising costs

Advertising costs, included in selling, general and administrative
expenses, are expensed as incurred and were $46,286 and $7,233 for
the years ended December 31, 2003 and December 31, 2004,
respectively.

(L) Foreign currencies

The Company uses the British Pound as its functional currency.
Transactions denominated in foreign currencies are translated at the
year-end rate with any differences recorded as foreign currency
transaction gains and losses and are included in the determination of net
income or loss. The Company has translated the financial statements into
US Dollars. Accordingly, assets and liabilities are translated using the
exchange rate in effect at the balance sheet date, while income and
expenses are translated using average rates. Translation adjustments are
reported as a separate component of stockholders' equity (deficit).

(M) Income taxes

Income taxes are provided based on the liability method of accounting
pursuant to Statement of Financial Accounting Standards No 109 "Accounting
for Income Taxes" ("SFAS 109"). In accordance with SFAS No 109, deferred
tax assets are recognised for deductible temporary differences and
operating loss carry forwards, and deferred tax liabilities are recognised
for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and
their tax basis. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.

(N) Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reported period. Actual
results could differ from such estimates.

41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004

2 Summary of Significant Accounting Policies (continued)

(O) Earnings Per Share

Earnings per share is based on the weighted average number of shares of
common stock and dilutive common stock equivalents outstanding. Basic
earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an
entity.

Basic and diluted earnings per share are the same during the year ended
December 31, 2003 and 2004 as the impact of dilutive securities is
antidilutive. There were 7,050,000 warrants to purchase shares of the
Company's common stock outstanding as of December 31, 2004.

(P) Warrants

The Company issues warrants to purchase shares of its common stock in
exchange for services and in combination with the sale of convertible
debentures. The Company accounts for warrants issued in exchange for
services in accordance with EITF 96-18 "Accounting for Equity Instruments
that are Issued to other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services". The Company records expenses based on
the fair value of the equity instruments. The Company measures the fair
value of the equity instruments using the stock price and other
measurement assumptions as of the earlier of (1) the date at which a
commitment for performance by the counterparty to earn the equity
instruments is reached, or (2) the date at which the counterparty's
performance is complete.

For the purposes of calculating earnings per share, the Company has
retroactively restated its outstanding common stock based upon the stock
split declared on April 22, 2003.

The Company accounts for warrants issued in combination with convertible
debentures in accordance with the provisions of EITF 00-27 "Application of
EITF 98-5 to Certain Convertible Instruments". Under the provisions of
EITF 00-27, the Company allocates the total proceeds received between the
convertible debentures and the warrants based on their relative fair value
at the date of issuance.

(Q) Recent Accounting Pronouncements

In January 2003, the FASB issued Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities" and in December 2003, a
revised interpretation was issued (FIN No. 46, as revised). In general, a
variable interest entity ("VIE") is a corporation, partnership, trust, or
any other legal structure used for business purposes that either does not
have equity investors with voting rights or has equity investors that do
not provide sufficient financial resources for the entity to support its
activities. FIN 46, as revised requires a VIE to be consolidated by a
company if that company is designated as the primary beneficiary. The
interpretation applies to VIEs created after January 31, 2003, and for all
financial statements issued after December 15, 2003 for VIEs in which an
enterprise held a variable interest that it acquired before February 1,
2003. The adoption of FIN 46, as revised, did not have a material effect
on the Company's financial position or results of operations.

42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004

2 Summary of Significant Accounting Policies (continued)

(Q) Recent Accounting Pronouncements (continued)

In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No 123, "Share-Based Payment"
("SFAS Statement 123R") which replaces SFAS No 123, "Accounting for
Stock-Based Compensation," and supercedes APB Opinion No 25, "Accounting
for Stock Issued to Employees." This statement requires that all
share-based payments to employees be recognized in the financial
statements based on their fair values on the date of grant. SFAS No 123R
is effective as of the beginning of the first interim or annual reporting
period that begins after December 31, 2005 and applies to all awards
granted, modified, repurchased or cancelled after the effective date. The
Company is evaluating the requirements of SFAS 123R and expects that its
adoption will not have a material impact on the Company's consolidated
results of operations and earnings per share.

In December of 2004, the FASB issued SFAS No 153, "Exchanges of
Nonmonetary Assets - an Amendment of APB Opinion No 29" (SFAS 153). SFAS
153 eliminates the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. SFAS 153 is
effective for fiscal years beginning after June 15, 2005 and is required
to be adopted by the Company in the first quarter of 2006. The Company
does not believe that the adoption of SFAS 153 will have a material impact
on the Company's consolidated results of operations or financial
condition.

3 Significant current assets and liabilities

Included within current assets and current liabilities are the following
significant balances:

The Company can now utilize the moulds and tooling acquired from the
acquisition of Jusco Toys Ltd (Hong Kong). The Company owns other moulds
and tooling included above that has a cost of $13,670, which it is
currently using and hence depreciating.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004

6 INCOME TAXES (CONTINUED)

The Company's effective tax rate of 0% differs from the statutory rate of
30% due to the fact that the Company, at this point in time, considers it
more likely than not that the deferred tax asset related to net operating
loss carryforwards will not be recognized. Accordingly, deferred tax assets
at December 31, 2003 and 2004 have been reduced by a valuation allowance
relating to the tax benefits attributable to net operating losses.
Operating losses can be carried forward indefinitely in the United Kingdom.
At December 31, 2004 net operating loss carry forwards totaled $3,065,635.

It has been assumed that any losses will be utilised against the first
available profits at a tax rate of 30% but a tax rate of 19% may be used,
if the small Company rate of tax is utilised.

7 SHORT TERM BORROWINGS

On July 10, 2002, the Company borrowed $240,000 from an individual lender.
The debt bears interest at 20% per year. The debt and all accrued interest
was originally due on January 10, 2003. The debt has not been fully repaid
and is due upon demand. Accordingly, the outstanding debt of $220,937 and
all accrued interest totaling $115,596 is included in short term

borrowings. The debt is collateralized by certain inventory of the
Company's subsidiary, Jusco UK Ltd.
In November 2003, the Company borrowed $250,000 from an individual lender.
There were no terms for repayment and no interest was charged to the

Company during the quarter. On April 28, 2004, the Company entered into an
agreement whereby it exchanged the debt of $250,000 for 500,000 shares of
common stock. See note 10.

8 ADVANCES FROM FACTOR

On January 13, 2003 the Company entered into an invoice factoring agreement
with IFT London Ltd ("IFT"). Under the agreement, the Company specifically
identified receivables that it wanted to receive advances on and submitted
them to IFT. Once IFT approved the receivables that were submitted, the
Company received 70% of the invoice amount. Customers were then instructed
to pay IFT directly. When the customer paid the entire outstanding balance
to IFT, the Company received the remaining 30% of the invoice amount, less
a financing charge equal to 8% of the total invoice amount. The Company no
longer factors receivables through this agreement.

On October 2, 2003 Cameo Collectables Limited entered into an invoice
factoring agreement with Arbuthnot Commercial Finance Ltd ("ACF"). Under
the agreement, the Company identified receivables that it wanted to factor
and submitted them to ACF. Once ACF approved the receivables that were
submitted it purchased the receivables with recourse and invoiced the
customers direct. ACF paid 100% of the invoice amount to a current account
on the collection date. Customers paid ACF directly.

ACF's financing charge of 1.75% of the total invoice amount was debited to
the current account. The Company was entitled to withdraw any credit
balance on the current account representing cleared funds.

The Company accounted for this arrangement in accordance with Statement of
Financial Accounting Standard No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." Under
the agreement any invoice not paid 6 months after the date on which it was
due to be paid can be re-sold back to the Company. Accordingly, the Company
recorded the advances received as a liability until the customer invoice is
paid in full. In addition, the Company recognized the interest charge in
full at the time the initial advance was received. The assets of Cameo
Collectables Limited are pledged as security to Arbuthnot Commercial
Finance Limited.

The above agreements ceased on the 21 January 2005.

46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004

9 CONVERTIBLE DEBENTURES

Convertible debentures are comprised of the following as at December 31,
2004:

The Company leases buildings under non-cancelable operating leases. Future
minimum lease payments under those leases are as follows at December 31,

2004
Year ending December 31, 2005 $40,415
======
Rent expense for all operating leases charged against earnings amounted to
$69,028 in 2003 and $57,109 in 2004.
11 CONTINGENT LIABILITIES

As at March 31, 2005, we are not a party to any material pending legal
proceeding, other than ordinary routine litigation incidental to our
business and except as described below.

In 2002, we entered into an agreement with CK Supermarket to provide
working capital on a short-term basis secured against certain inventory of
our subsidiary, Jusco UK Ltd. At December 31, 2004, the balance was
$386,095 including interest of $115,596.. The debt was originally due on
January 10, 2003. At March 31, 2004, it was envisaged that the loan would
be repaid in 2004 from revenues from the sale of inventory. In May 2004,
the lender notified us regarding immediate payment of the balance owed. We
have been and remain in discussion with the lender regarding the repayment
of the debt through a combination of cash from the sale of certain
inventory and the issuance of our securities. In the event the repayment
issue is not resolved, the lender could institute a legal proceeding
against our subsidiary, Jusco UK Ltd, seeking repayment. The lender has a
security interest on the assets of our subsidiary, Jusco UK Ltd., but does
not have a security interest in our parent company or our other
subsidiaries. As CK Supermarket has previously targeted the assets of Jusco
UK Ltd. for use in repaying the lender, we believe that a proceeding
against our subsidiary, Jusco UK Ltd. would not have a material effect on
our operations.

On January 26, 2004, we entered into an agreement with POW! Entertainment
LLC for the development and exploitation of the property "Tattoo - the
Marked Man". We have the worldwide distribution and merchandising rights in
perpetuity and the agreement describes a payment of $250,000 to fund
project development. The payment was subject to certain deliverables from
POW! upon which payment was anticipated to be made on the earlier of August
31, 2004 or ten business days after the effective date of our registration
statement filed in February 2004. Stan Lee is to develop the concept, based
on characters created by the Shorrocks. The project was geared toward
creating a motion picture based on the character.

47

The parties were to share all profits received from the project, after
deduction of expenses, and in addition, POW would have been entitled to any
executive producer fees from theatrical and television releases. We have
not yet paid the amounts due to POW! under the agreement, and it appears
that the transaction has been abandoned. We believe that we have
meritorious defenses to any potential claims.

On August 13, 2004, in a labor action entitled Thomas Bernard Skahill v.
Peak Entertainment Holdings, Inc. before the Labor Commissioner of the
State of California, the Company was ordered to pay $24,358.27 in wages,
expenses, penalties, and interest in connection with an employment claim.
We are informed that the matter was confirmed as a judgment on or about
October 15, 004 by the Superior Court of the State of California in the
amount of $24,938.57.

48

We are informed that on or about April 6, 2004, James E. Skahill and Marie
A. Skahill filed a complaint for damages for breach of contract against
Peak Entertainment Ltd. before the Superior Court of the State of
California for the County of Los Angeles, Northeast District, Case No.
GC033622 alleging breach of a lease and seeking damages in an amount to be
determined. We believe that the matter was not properly commenced with
proper service upon Peak Entertainment Ltd. We have not submitted a
response to the matter before the Superior Court of the State of
California. We are unaware of the present status of the matter before the
Superior Court of the State of California and we are unable to evaluate the
likelihood of an unfavorable outcome, nor provide an estimate of the amount
or range of potential loss.

On January 5, 2004, we completed a transaction, pursuant to a Settlement
Agreement and Release dated as of December 22, 2003, with former debenture
holders: AJW Partners, LLC, New Millennium Capital Partners II, LLC, AJW
Offshore, Ltd, and AJW Qualified Partners, LLC. Pursuant to the terms of
the settlement agreement, the former debenture holders had the right,
thirteen months after the closing of the transaction, to provide notice to
the Company of an exercise of a "put" right pursuant to which we would buy
from the former debenture holders all of the 1,000,000 shares of common
stock issued to them pursuant to the settlement agreement, at the price of
$0.75 per share. Pursuant to the terms of the settlement agreement, the
former debenture holders were to provide us with written notice if they
wished to exercise the put right after thirteen months and prior to one
year and two months after the closing of the transaction, at the expiration
of which, the put right terminates. Closing on the put was to occur within
ten business days from receipt of notice of the put. On or about January
10, 2005, the former debenture holders submitted a notice to exercise the
put right. On or about January 26, 2005, the former debenture holders
resent the January 10, 2005 notice to exercise the put right. We believe
that the notice was not properly submitted in accordance with the notice
procedures provided in the settlement agreement. To the best of our
knowledge, and after inquiry to the counsel for the former debenture
holders of the "put", no notice of exercise of the "put" was sent to us.
Accordingly, we considered the notice ineffective and did not honor the
notice. In or about March 2005, an agent for the former debenture holders
informed us that the former debenture holders may institute a legal
proceeding to enforce their put rights. We understand that the former
debenture holders filed a lawsuit in this regard in or about March 21,
2005. As of May 6, 2005, we have not been served with the lawsuit. In the
event that we are served with a lawsuit, we intend to contest the matter
vigorously. We may be required to pay $750,000 for repurchase of 1,000,000
shares of common stock from the former debenture holders, plus potential
interest and costs, if we lose such threatened litigation.

12 TRANSACTIONS WITH RELATED PARTIES

The relationship between the Company and its related parties are:

Wilfred and Paula Shorrocks are deemed to be related parties as they are
directors and shareholders of Peak Entertainment Holdings, Inc.

Terence Herzog and Michael Schenkein are deemed to be related parties as
they are principals of Agora Capital Partners Inc, a management consulting
company. They were directors of Peak Entertainment Holdings, Inc. Terence
Herzog is a shareholder of Peak Entertainment Holdings, Inc. In December
2004, Mr. Herzog and Mr. Schenkein resigned as directors of the Company.

During the period the company had the following transactions with its
related parties:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004

12 TRANSACTIONS WITH RELATED PARTIES (CONTINUED)

Interest amounting to $24,038 in the year to December 31, 2004 and
$nil in the year to December 31, 2003 has been accrued.

On March 24, 2004, the Company signed a promissory note which
established a repayment schedule for the amounts advanced by the
stockholders. The amount advanced is to be repaid in installments of
$25,000 on January 31, 2005, May 31, 2005, September 30, 2005,
December 31, 2005, March 31, 2006 and September 30, 2006 and
installments of $100,000 on March 31, 2007 and September 30, 2007,
with any balance to be repaid in full on January 31, 2008.

Interest will accrue commencing July 1, 2005 on any unpaid balance, at
8% per annum.

The promissory note provides for earlier repayment of any unpaid
balance subject to various future financial results of the Company.

ii) License agreement

On April 30, 2002, the Company entered into a license agreement with
Wilfred and Paula Shorrocks whereby the Company acquired the exclusive
rights to apply various intellectual properties to the manufacture,
distribution and sale of products on a worldwide basis. Under the
terms of the agreement the Company has undertaken to pay to Wilfred
and Paula Shorrocks a guaranteed minimum royalties amount of US
$1,000,000, with the agreement treated for accounting purposes as due
to expire on December 31, 2023. On April 14, 2004, the Company entered
into an amendment of the license agreement which established a minimum
quarterly royalty payment of $12,500 beginning September 30, 2004.
This liability is included in license fees payable and the related
asset is included in intangible assets.

On February 25, 2002, the Company entered into a license agreement for
rights to Monsters In My Pocket from Morrison Entertainment Group,
Inc., in which Wilfred and Paula Shorrocks were also parties. Pursuant
to the agreement, Wilfred and Paula Shorrocks were individually
entitled to a certain percentage of the revenues. The Company was
entitled to 10% of the revenues from the United States, 35% of the
revenues from the United Kingdom, and 40% of the revenues from other
territories. Morrison Entertainment Group was entitled to 60% of the
revenues from the United States, 32.5% of the revenues from the United
Kingdom, and 30% of the revenues from other territories. The Shorrocks
were entitled to 30% of the revenues from the United States, 32.5% of
the revenues from the United Kingdom, and 30% of the revenues from
other territories. The revenue allocation referred to revenues from
character and merchandise licensing and sales activities, and the
allocation was to be adjusted for entertainment production financing
terms. In October 2004, Morrison Entertainment Group sent the Company
a notice terminating any and all agreements with the Company. On
December 22, 2004, the Company entered into an agreement with Morrison
Entertainment Group, whereby the parties dissociated the Company's
Monster Quest property and products from Morrison Entertainment
Group's Monster In My Pocket property and products. Any and all
agreements between the parties entered into prior to December 22,
2004, including license agreements, were terminated.

50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004

12 TRANSACTIONS WITH RELATED PARTIES (CONTINUED)

b) Terence Herzog and Michael Schenkein

i) Consulting services

From March 2003 through June 2004, Agora Capital Partners Inc,
through Terence Herzog and Michael Schenkein, has provided
management consulting services to the Company. The Company paid
aggregate fees of $nil in the year to December 31, 2004 and
$46,000 in the year to December 31, 2003.

13 WARRANTS

On July 24, 2003, pursuant to a consulting agreement with POW!
Entertainment LLC and Stan Lee, the Company issued to POW warrants to
purchase 750,000 shares of the Company's common stock exercisable for five
years at $0.35 per share in exchange for consulting services to be provided
over a three year term. Warrants to purchase 375,000 shares of common stock
vested upon execution of the consulting agreement, and the remaining
warrants to purchase 375,000 shares of common stock vested on July 24,
2004. POW has the right to demand registration of the shares of common
stock underlying the warrant at the Company's expense, although no demand
had been received at the date of this report.

The warrants have been valued using the Black-Scholes Option Model. The
value of the warrants that vested immediately was $390,000 on the date of
grant. The value of these warrants has been recorded as deferred
professional fees and will be amortized to earnings ratably over the three
year service period.

The value of the warrants that were subject to future vesting, and vested
on July 24, 2004, were determined at the end of each reporting period. The
Company recorded the expense for each quarter based on the value of the
warrants at the end of each reporting period. For the quarter ended June
30, 2004, the Company recorded an expense of $10,918 related to these
warrants, and for the six months ended June 30, 2004, the Company recorded
an expense of $9,295.

On July 15, 2003, pursuant to a consulting agreement with Mr Jack Kuessous,
the Company issued to Mr Kuessous warrants to purchase 240,000 shares of
the Company's common stock with an exercise price of $1.20 per share in
exchange for consulting services over a one year period. The warrants
vested immediately upon execution of the consulting agreement. The warrants
have been valued using the Black-Scholes Option Model and had a value of
$263,983 on the date of grant. The value of these options has been recorded
as a current asset and has been fully amortized to earnings.

On December 17, 2003, the exercise price of the warrants held by Mr.
Kuessous was changed from $1.20 per share to $0.50 per share. The amount to
be expensed over the remaining service period related to the $1.20 warrants
was the remaining unamortized fair value of the $0.50 warrants as of
December 17, 2003, plus the amount by which the fair value of the $1.20
warrants valued as of December 17, 2003 was greater than the fair value of
the $0.50 warrants immediately before the terms were modified. The Company
used the Black-Scholes Option Model and determined that the value of the
$0.50 warrants immediately prior to the conversion of the terms was
essentially the same as the $1.20 warrants granted on December 17, 2003.
Accordingly, the Company has now fully amortized the original value of
$263,983.

51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004

13 WARRANTS (CONTINUED)

In July 2003, Mr Kuessous advanced the Company $100,000. On December 17,
2003, the Company entered into a "Cancellation of Debt in Exchange for
Securities Agreement", whereby Mr Kuessous cancelled the $100,000 owed to
him by the Company in exchange for 583,333 shares of common stock of the
Company and 150,000 common stock purchase warrants with an exercise price
of $0.50 per share. The warrants vested immediately and are exercisable
over a three year period. The warrants have been valued using the
Black-Scholes Option Model and had a value of $79,449 at the date of grant
and the common stock had a value of $332,500 on the date of issuance. The
total value of the common stock and warrants is $411,995 and was compared
with the $100,000 carrying value of the advances, resulting in an
additional expense of $311,995, which was included in selling, general and
administrative expenses in 2003.

On January 5, 2004, the Company completed a "Settlement Agreement and
Release" with former holders of 12% convertible debentures. Under the
agreement, the Company exchanged $1,000,000 and 1,000,000 shares of
unregistered common stock in return for the surrender of an aggregate of
$215,000 principal amount of 12% convertible debentures, accrued interest
and warrants to purchase 645,000 shares of common stock, issued pursuant to
a "Securities Purchase Agreement" dated as of February 28, 2002, and an
aggregate of $785,000 principal amount of 12% convertible debentures,
accrued interest and warrants to purchase 1,570,000 shares of common stock,
issued pursuant to a "Securities Purchase Agreement" dated as of April 22,
2003. The $1,000,000 consisted of $500,000 paid on January 5, 2004 and
$500,000 in promissory notes, which was subsequently paid on March 22,
2004. The agreement provided that, after a period of thirteen months from
January 2004, all of the 1,000,000 shares of common stock still owned at
that time by the former debenture holders may be put to the Company at a
price $0.75 per share, on an all-or-none basis, for a one month period. The
Company also paid for $10,000 of the former debenture holders' legal fees
and expenses in connection with the transaction.

The Company accounted for this transaction in accordance with EITF 00-27
"Application of Issue 98-5 to Certain Convertible Instruments".
Accordingly, the Company first allocated the consideration paid based on
the fair value of the warrants to be repurchased and the beneficial
conversion features as of January 5, 2004. Any remaining consideration was
used to offset the carrying value of the convertible debentures and accrued
interest and resulted in a gain on the extinguishment of the debt. The
Company determined that the fair value of the warrants to be repurchased
and the beneficial conversion features at January 5, 2004 exceeded the
total consideration to be paid of $1,580,000. Accordingly, the Company
recorded a gain on the extinguishment of the convertible debentures and
accrued interest. In accordance with FAS 133, the 1,000,000 shares of
common stock are considered an embedded derivative instrument and recorded
as equity.

On January 5, 2004, the Company entered into "Securities Purchase
Agreements" with four accredited investors. Pursuant to the agreements, the
Company sold $1,500,000 in 8% convertible debentures due January 5, 2007
and 3,000,000 common stock purchase warrants, exercisable for five years at
$0.50 per share. The purchase price totaled $1,500,000, of which $750,000
was paid in cash, and $750,000 by promissory notes. The principal amount of
the debentures, plus any accrued and unpaid interest on the debentures, may
be converted into shares of common stock at the conversion price of $0.30
per share. The conversion price may be adjusted downward for issuances of
securities by the Company at prices below the lower of $0.50 per common
share, or fair market value for such securities as determined at the time
of issuance. Annual interest payments on the debentures are due on January
7 of each year, commencing January 7, 2005. At the option of the Company,
interest payments may be accrued beyond the annual interest payment date,
in which event the debenture holder shall have the option to accrue the
interest payment then due for another interest payment period, or cause the
Company to issue common stock in exchange for interest. Unless upon 75 days
prior written notice, the debenture and warrant holder may not convert the
debentures or warrants for shares of common stock to the extent that such
conversion would cause it to beneficially own 4.9% or more of our then
issued and outstanding common stock. After the tenth consecutive business
day in which the common stock trades at $3.00 or greater, the warrants
become redeemable at $0.10 per warrant.

52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004

13 WARRANTS (CONTINUED)

The warrants have been valued using the Black-Scholes Option Model at a
value of $1,649,901 at the date of grant. A discount of the full amount of
the debt was recorded and will be amortized over the life of the debt of
approximately 3 years.

During the quarter to September 30, 2004, $541,000 of the 8% convertible
debentures was converted at $0.30 per share into 1,805,000 shares of common
stock. A loss on conversion of $481,395 was recognized during that quarter.

On January 23, 2004, the Company entered into an agreement for services to
be provided over twelve months with Vintage Filings, LLC. It issued 300,000
common stock purchase warrants, which vested immediately and are
exercisable for three years at $0.50 per share pursuant to the agreement.
The warrants have been valued using the Black-Scholes Option Pricing Model
and have a value of $224,988 at the date of grant. The value of the
warrants will be recorded as additional selling, general and administrative
expenses ratably over the twelve month service period.

On January 29, 2004, the Company entered into a "Securities Purchase
Agreement" with Shai Stern. Pursuant to the agreement, it issued $50,000 in
8% convertible debentures due January 29, 2007 and 100,000 common stock
purchase warrants. The principal amount of the debentures, plus any accrued
and unpaid interest on the debentures, may be converted into shares of
common stock at the conversion price of $0.30 per share. Annual interest
payments on the debenture are due on January 29 of each year, commencing
with January 29, 2005. At the option of the Company interest payments may
be accrued beyond the annual interest payment date, in which event the
debenture holder shall have the option to accrue the interest payment then
due for another interest payment period, or cause the Company to issue
common stock in exchange for interest. The warrants are exercisable for
three years at a price of $0.50 per share. After the tenth consecutive
business day in which the common stock trades at $3.00 or greater, the
warrants become redeemable at $0.10 per warrant.

The warrants have been valued using the Black-Scholes Option Pricing Model
and have a value of $51,997 at the date of grant. The Company has recorded
these debentures and warrants in accordance with the provisions of EITF
00-27 "Application of Issue 98-5 to Certain Convertible Instruments". Under
the provisions of EITF 00-27, the Company has allocated the total proceeds
received between the convertible debentures and the warrants based on their
relative fair value at the date of issuance. The Company has then estimated
the intrinsic value of the beneficial conversion feature. The Company has
determined that the intrinsic value of the beneficial conversion feature
exceeds the face value of the debt and accordingly, the Company has
recorded a debt discount of $50,000. The debt discount will be amortized as
interest expense over the life of the debentures, which is three years.

On September 28, 2004, the Company entered into a "Securities Purchase
Agreement" with three accredited persons. Pursuant to the agreements, the
Company sold 1,666,666 shares of common stock and 1,750,000 common stock
purchase warrants, exercisable for three years at $0.50 per share, for an
aggregate purchase price of $500,000.

Prior to the termination date, the warrant shall be callable, under the
circumstances described below, at the discretion of the company, for $0.10
per warrant. The Company's right to call shall be exercisable commencing
upon the day following the tenth consecutive business day during which the
Company's common stock has traded at prices of, or in excess of, $1.75 per
share, subject to adjustment for stock splits, dividends, subdivisions,
reclassification and the like, with weekly volume of such trading being in
excess of the total number of shares represented by this warrant. In the
event the Company exercises its right to call the warrants, the Company
shall give the Holder written notice of such decision. In the event that
the Holder does not exercise all or any part of the warrants or the Company
does not receive the warrant from the Holder within 30 days from the date
on the notice to the Holder of the Company's intension to redeem the
warrant, then the warrant shall be deemed canceled, and the holder shall
not be entitled to further exercise thereof or to the redemption fee.

53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004

13 WARRANTS (CONTINUED)

The value of the stock and warrants is made more difficult due to the call
provision of the warrant, which reduces the value of the warrant. The
Company recognizes that due to the call provision it is inappropriate to
value the warrant using the Black-Scholes Option Model. The Company has
calculated the fair value of the common stock at a price of $0.21 per
share, being the trading price at September 28, 2004. The remaining
proceeds of $150,000 have been allocated as the value of the warrants at
the date of the grant.

14 SHARE TRANSACTIONS

On February 11, 2004, the Company entered into a financial advisor
agreement with Ameristar International Capital, Inc. It issued 100,000
shares of common stock as an initial equity fee pursuant to the agreement.
These shares had a fair value of $43,000 at the date of grant. The Company
has recorded the value of the common stock as an expense, as there is no
continuing benefit.

In 2003, the Company entered into an agreement with William Ivers in
connection with business consulting services, relating to the preparation
of a written business plan rendered by Mr Ivers. In exchange for these
services, the Company agreed to pay $19,012 in cash and issue 16,667 shares
of common stock at a future date. On February 12, 2004, the Company issued
16,667 shares of common stock to Mr Ivers at a value of $8,333 at the date
of grant. Accordingly, the Company expensed the value of the shares at
December 31, 2003 and recorded a corresponding liability.

In 2003, the Company entered into an agreement with Lou Schneider in
connection with business consulting services, related to establishing
potential apparel-related licensing relationships with third parties,
rendered by Mr Schneider. In exchange for these services, the Company
agreed to issue 20,000 shares of common stock at a future date. On February
12, 2004, the Company issued 20,000 shares of common stock to Mr Schneider
at a value of $10,000 at the date of grant. Accordingly, the Company
expensed the value of the shares at December 31, 2003 and recorded a
corresponding liability.

In 2003, the Company entered into an agreement with Rolin Inc to provide
financial advisory services in exchange for common stock of the Company. On
February 12, 2004, the Company issued an aggregate of 20,409 shares of
common stock to Rolin Inc. These shares had a fair value of $10,204 at the
date of grant. The Company has recorded the transaction as professional
fees expensed in the quarter ended March 31, 2004.

On March 10, 2004, the Company entered into "Securities Purchase
Agreements" with eleven accredited investors. Pursuant to the agreements,
the Company sold an aggregate of 1,000,000 shares of common stock and
600,000 common stock purchase warrants, exercisable for three years at
$0.75 per share, for a total purchase price of $500,000.

Legend Merchant Group, Inc acted as the placement agent for the above
transaction. All of the purchasers were pre-existing customers of Legend
Merchant Group. The Company paid Legend a fee of $25,000, and 100,000
common stock purchase warrants exercisable for three years at $0.50 per
share and 60,000 common stock purchase warrants exercisable for three years
at $0.75 per share, for its services. The warrants have been valued using
the Black-Scholes Option Pricing Model and have a value of $92,794 at the
date of grant which was March 10, 2004 The total fee of $117,744 has been
offset against the proceeds of the offering.

54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004

14 SHARE TRANSACTIONS (CONTINUED)

On September 1, 2004, the Company entered into a consultancy agreement with
CEOcast, Inc. to provide consultancy services for a six month period
commencing September 1, 2004, in exchange for 400,000 shares of common
stock of the Company. These shares had a value of $44,000 at the date of
grant.

On August 17, 2004, the Company issued 75,001 shares to Portfolio PR in
connection with professional services provided. The shares had a value of
$18,750 at the date of the grant. The Company expensed $36,000 as
professional fees during the quarter, being the value of professional
services received, and recognized a profit of $17,250 on issue of the
shares.

15 REVERSE ACQUISITION

On April 22, 2003, Palladium Communications, Inc. ("Palladium') (a US
public company) issued 19,071,684 shares of its common stock for all of the
outstanding common stock of Peak Entertainment Holdings, Inc. Immediately
prior to the transaction, Peak Entertainment Holdings, Inc authorized a
stock split so that the outstanding shares of common stock were increased
from 2 to 19,071,684. Immediately after the transaction, the shareholders
of Peak Entertainment Holdings, Inc (Wilf and Paula Shorrocks) owned
approximately 90% of the outstanding common stock of Palladium. This
transaction has been accounted for as a reverse acquisition of a public
shell. The accounting for a reverse acquisition with a public shell is
considered to be a capital transaction rather than a business combination.
That is, the transaction is equivalent to the issuance of common stock by
Peak for the net monetary assets of Palladium, accompanied by a
recapitalization. Palladium's net deficit has been recorded at carryover
basis and no goodwill was generated in the transaction. The net deficit of
Palladium, $215,500, at the time of transaction is included in
stockholders' equity. The other side of this transaction is to add $215,500
in liabilities related to convertible debentures to the historical
financial statements of Peak Entertainment Holdings Inc. The historical
financial statements of the "registrant" become those of Peak Entertainment
Holdings, Inc. Subsequent to the transaction, Palladium changed its name to
Peak Entertainment Holdings, Inc.

16 STOCKHOLDERS' EQUITY

Immediately following the reverse acquisition on April 22, 2003, the
Company entered into an agreement for the issuance of up to $785,000 in
convertible debentures and warrants to purchase 1,570,000 shares of the
Company's common stock. The Company received $300,000 at the time of
execution of the agreement for the issuance of the debentures and warrant
and received the remainder of $250,000 on June 26, 2003 and $235,000 on
July 11, 2003. The debentures and warrants were subsequently repurchased in
January 2004.

The debentures carried interest at 12%, matured one year from the date of
issuance and were convertible at the option of the holder at the lower of
$1.00 or 50% of the average of the three lowest intra-day trading prices
for the common stock on a principal market for the 20 trading days before
but not including the conversion date. The warrants were exercisable for
five years at $0.31 per share.

The Company recorded these debentures and warrants in accordance with the
provisions of EITF 00-27 "Application of Issue 98-5 to Certain Convertible
Instruments". Under the provision of EITF 00-27, the Company allocated the
total proceeds received between the convertible debentures and the warrants
based on their relative fair values at the date of issuance. The Company
then estimated the intrinsic value of the beneficial conversion feature
resulting from the ability of the debenture holders to convert at a 50%
discount. As a result, the Company recorded a debt discount of $785,000.
The debt discount was amortized as interest expense over the life of the
debentures of one year.

55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2004

16 STOCKHOLDERS' EQUITY (CONTINUED)

On February 28, 2002, Palladium, the predecessor to Peak Entertainment
Holdings, Inc entered into an agreement pursuant to which Palladium issued
$215,000 in convertible debentures and issued warrants to purchase 645,000
shares of the Company's common stock exercisable for five years at $0.31
per share. These debentures and warrants were subsequently repurchased in
January 2004.

On April 28, 2004, the Company entered into an agreement with Laura
Wellington, whereby it exchanged a debt of $250,000 owed to Ms Wellington
for 500,000 shares of common stock. Ms Wellington had loaned $250,000 to
the company in November 2003. The total value of the common stock at the
date of grant was $250,000 compared with the $250,000 carrying value of
the advance, so there was no additional expense.

On July 23, 2004, the Company entered into an agreement with Laura
Wellington, whereby it exchanged a debt of $194,000 owed to Ms Wellington
for 388,000 shares of common stock. The total value of the common stock at
the date of the grant was $194,000 compared with the $194,000 carrying
value of the debt, so there was no additional expense.

17 SUBSEQUENT EVENTS

On January 4, 2005, the Company entered into a consulting agreement with
Salvani Investments, pursuant to which it issued 1,000,000 warrants,
exercisable for 5 years at $0.50 per share, in exchange for business
consulting and investor relations services.

On January 5, 2005, the Company sold to Dan Brecher 250,000 warrants,
exercisable for three years at $0.50 per share, for $2,500.

On March 1, 2005, the Company entered into a loan agreement for $500,000
with Tayside Trading Ltd. Pursuant to the loan agreement, the Company
issued 500,000 warrants, exercisable for five years at $0.50 per share, to
the lender. The Company also granted the lender an option exercisable
commencing with the date of return of the $500,000 and expiring two weeks
thereafter, to acquire, at the purchase price of $100,000, (i) shares of
the Company's common stock at $0.30 per share (333,333 shares) and (ii)
warrants to purchase 200,000 shares of common stock, exercisable for five
years at $0.50 per share. The Company agreed to grant the lender, as
collateral, rights to the Company's intellectual property, to the extent
not already encumbered. The Company used the funds to fund a $500,000
letter of credit, which was subsequently terminated in April 2005. The
principal amount of the loan was returned in April 2005, with accrued
interest still owed. As the principal was not paid by March 30, 2005, as
penalty, in April 2005, the Company issued 1,800,000 shares as a late
payment penalty.

On March 2, 2005, the Company issued 50,000 warrants, exercisable for five
years at $0.50 per share, to Aaron M. Lasry in return for business
consulting services.

On April 10, 2005, we issued 159,575 shares of restricted common stock to
Crescent Fund, LLC in return for financial consulting services.